Recent Advances and Applications in Market Design

Paper Session

Friday, Jan. 6, 2017 2:30 PM – 4:30 PM

Hyatt Regency Chicago, Water Tower
Hosted By: Econometric Society
  • Chair: Parag Pathak, Massachusetts Institute of Technology

Match or Mismatch: Learning and Inertia in School Choice

Yusuke Narita
,
Massachusetts Institute of Technology

Abstract

Centralized matching markets are designed assuming that participants make well- informed choices upfront. However, this paper uses data from NYC’s school choice system to show that families’ choices change after the initial match as they learn about schools. I develop an empirical model of evolving demand for schools under learning, switching costs, and demand responses to prior assignments. These model components are identified by using admissions lotteries and other institutional features. The estimates suggest that there are even more changes in underlying demand than in observed choices, undermining the welfare performance of the initial match. To alleviate the welfare cost of demand changes, I theoretically and empirically investigate dynamic mechanisms that best accommodate choice changes. These mechanisms improve on the existing discretionary reapplication process. In addition, the gains from the mechanisms change substantially depending on the extent of demand-side inertia caused by switching costs. Thus, the gains from a centralized market depend not only on its design but also on demand-side frictions (such as demand changes and inertia).

Allocative Issues in Race Neutral Affirmative Action

Parag Pathak
,
Massachusetts Institute of Technology

Abstract

Affirmative action schemes must confront the tension between admitting the highest
scoring applicants and ensuring diversity. In Chicago’s affirmative action system for exam schools, applicants are divided into one of four socioeconomic tiers based on the characteristics of their neighborhood. Applicants can be admitted to a school either through a slot reserved for their tier or through a merit slot. Equity considerations motivate equal percentage reserves for each tier, but there is a large debate on the total size of these reserve slots relative to merit slots. An issue that has received much less attention is the order in which slots are processed. Since the competition for merit slots is influenced directly by the allocation to tier slots, equal size reserves are not sufficient to eliminate explicit preferential treatment. We characterize processing rules that are tier-blind. While explicit preferential treatment is ruled out under tier-blind rules, it is still possible to favor certain tiers, by exploiting the distribution of scores across tiers, a phenomenon we call statistical preferential treatment. We characterize the processing order that is optimal for the most disadvantaged tier assuming that these applicants systematically have lower scores. This policy processes merit slots prior to any slots reserved for tiers. Our main result implies that Chicago has been providing an additional boost to the disadvantaged tier beyond their reserved slots. Using data from Chicago, we show that the bias due to processing order for the disadvantaged tier is comparable to that from the 2012 decrease in the size of the merit reserve.

Bringing Real Market Participants' Real Preferences Into the Lab: An Experiment that Changed the Course Allocation Mechanism at Wharton

Eric Budish
,
University of Chicago
Judd B. Kessler
,
University of Pennsylvania

Abstract

This paper reports on an experimental test of a new market design that is attractive in theory but without direct precedent and "complex" in ways that question its suitability for practice. These challenges led to a novel experimental design that used real market participants, tested their ability to accurately report complex preferences, and searched for unintended consequences the theory might have missed. Despite imperfect preference reporting, the new mechanism outperformed the status quo on all quantitative measures of efficiency and fairness and various qualitative measures of satisfaction. The experiment successfully brought the new market design from theory to practical implementation.

The Allocation of Food to Food Banks

Canice John Prendergast
,
University of Chicago

Abstract

Food banks throughout the U.S. provide nutrition to the needy. Much of the food that is distributed through food banks often originates with donors - large manufacturers or distributors - far from those needy clients. How that food is distributed by Feeding America, a large not-for-profit, is the subject of this work. In 2005, Feeding America transitioned from the centralized allocation process, where they would make decisions based on their perception of food bank need, to one where local affiliates would bid for food items through an online auction mechanism. To do so, Feeding America constructed a specialized constructed currency called ``shares" that are used to bid on loads of donated food. The process by which this change came about, and its outcomes are described. We also offer a framework that helps to understand the dimensions and magnitude of its welfare implications. By most objective measures, the change has been a huge success: the wide variation of food bank's demand for food is now represented in their allocations, and there was a large and immediate increase in supply of 100 million pounds of food.
JEL Classifications
  • I0 - General